Investment Line is a regular investment bulletin produced by Mattioli Woods plc. The communication provides an update on funds, highlights some of the areas we are currently focusing on, and our thoughts on the issues of the day.
Equity markets have rallied strongly since their mid-February lows predominantly due to comments from central banks which have soothed concerns. Additional impetus will have also been provided by strong corporate buy back activity (which will reduce ahead of earnings season), but it is difficult to feel that there is any real strength behind the bounce back from what were short-term, oversold levels last month. The relatively dramatic rise in the oil price has proven to be reassuring as well as this has alleviated pressure on sovereign wealth funds and the high yield bond market in the US. The Federal Reserve has made some more dovish pronouncements over the last few weeks and the European authorities are clearly willing to continue to support risk assets, but the markets continue to feel “tired” and less responsive of late to stimulus, or promises of it. In short, there has been no material shift in global economic expectations over the last month, and the host of well-established concerns remain. The environment continues to justify caution.
Markets initially reacted poorly to the announcement of a host of extraordinary measures from Mario Draghi, President of the European Central Bank (ECB). It appeared that this was due to the suggestion that deposit rates were not going to be further lowered into negative territory after the most recent 0.1% reduction to -0.4%, though this is hard to reconcile with the concerns markets had formulated over negative rates and the impact on the banking system. Other measures focused on boosting lending and the overall focus seems to have moved away from further currency devaluation to achieving growth through stimulating demand. Lowering the cost of borrowing and encouraging risk taking were also behind the announcement that the ECB would purchase investment grade corporate bonds. It makes one wonder whether we will ultimately see purchases of equities by central banks, and any reassurance provided by the measures is tempered by the thoughts about where this might all end. Economic data from Europe remains tepid and the continent’s structural problems leave us disinclined to add to our exposure.
Private Equity is a theme which we have been considering for some time and we are now in the process of adding an allocation in medium to higher risk portfolios. As the name suggests, private equity involves investing in unlisted companies and can broadly be split into earlier-stage venture capital and more traditional later-stage investments. Familiar names of companies in private equity hands include New Look, Hugo Boss and TGI Fridays. Whilst there is always an element of these potential investments being higher risk through being unproven, early stage start-ups or distressed to justify consideration on the basis of valuation, private equity managers tend to be more active than those in the public equity arena and have demonstrated an ability to enhance the value of companies in which they invest. To a degree, the decision to invest in vehicles, which can create significant change at companies, is an extension of some of our recent thinking on market capitalisation, with a focus on the capacity to transform and grow businesses in a world of weak growth.
Investment Line is written and edited by members of the Mattioli Woods Group Investment Committee, and is for information purposes only. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances.
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